Since the Austrian Arbitration Act 2006 entered into force, it has been widely disputed between legal scholars, whether and to what extent the consumer protection clause of the Act – which severely restricts the possibility of concluding arbitration agreements with consumers – also applies in disputes between shareholders when the arbitration agreement is incorporated in the statutes of association.
Sec 617 of the Austrian Code of Civil Procedure (“ACCP”) provides that arbitration agreements concluded between an entrepreneur and a consumer are only valid, if (i) the agreement was concluded only after a dispute has arisen, (ii) the arbitration agreements is contained in a separate document, (iii) the entrepreneur handed over written legal instructions to the consumer detailing the differences between arbitration and litigation, and (iv) the seat of the arbitration is determined in the arbitration agreement and is sited in the country where the consumer is domiciled (unless the consumer invokes the arbitration clause). Additionally, this provision sets forth several grounds for setting aside an arbitral award in cases where a consumer is involved.
Against this background, doubts arise as to the validity of an arbitration agreement incorporated into the articles of association, if one of the shareholders qualifies as a consumer. In its decision 6 Ob 43/13m dated 16 December 2013, the Austrian Supreme Court for the first time dealt with the scholarly opinions in this regard. Quite surprisingly, and against its own tradition of arbitration friendly jurisprudence, the Supreme Court dismissed the stance taken by the majority in literature and came to the conclusion that the consumer protection clause of the Act has to be applied in its strictest sense for disputes between shareholders in cases where arbitration proceedings are seated in Austria.
The current decision was based on an action to set aside an arbitral award arguing that no valid arbitration agreement was concluded between the parties due to the alleged violation of the consumer protection clause. However, despite the fact that the Supreme Court verified the full applicability of this clause in relation to shareholders disputes, it denied the motion as the two Claimants in the setting aside proceedings did not qualify as consumers.
The setting aside proceedings were initiated by a Bulgarian businessman (“First Claimant”) and a Liechtenstein establishment controlled by the Bulgarian businessman (“Second Claimant”, together “Claimants”). First Claimant operates a fruit juice empire under a complex company structure. The structure included a company in Cyprus as well as Second Claimant.
In 2008 a joint venture agreement was concluded with a British investment company (“Defendant”) to establish a cooperation between the parties. However, as the cooperation failed Defendant initiated arbitration proceedings in Vienna under the auspices of the International Chamber of Commerce as was provided for under the joint venture agreement.
In the arbitration proceedings Claimants argued that the arbitral tribunal was not competent to hear and decide the case since Claimants were consumers according to Austrian law; hence the arbitration agreement between the parties was ineffective as the stipulations of the consumer protection clause of the Austrian Arbitration Act were not met. The arbitral tribunal dismissed Claimants’ jurisdictional objection by means of a partial award, and in its final award granted Defendant relief in the amount of approximately EUR 10 Mio.
Against these arbitration awards, Claimants initiated setting aside proceedings before the Austrian courts.
The Supreme Court at the outset once more endorsed its general view that disputes between shareholders can in general be decided by an arbitral tribunal. Furthermore, the Supreme Court held that Sec 617 ACCP cannot be construed as to restrict the objective arbitrability under Austrian law. Rather, the fulfilment of the pre-requisites laid down in this provision are additional conditions to determine the validity of an arbitration agreement (this determination is of some importance for the recognition of foreign arbitral awards in Austria).
After these two general proclamations, the Austrian Supreme Court immersed itself into the controversial issue, whether Sec 617 ACCP is to be applied to shareholder disputes. After illustrating the opinions presented in 17 different articles, the Supreme Court dismissed all of these scholarly opinions. The Supreme Court firstly argued that Sec 617 ACCP must be applied by any arbitral tribunal seated in Austria, irrespective of the origin of the parties to the arbitration proceedings. Subsequently, the Supreme Court analysed the intent of the legislator by referring to the materials of the amendment of the Austrian Arbitration Act in 2013. According to the Supreme Court, it can be inferred from these materials and the fact that the legislator – despite the controversy in the literature – did not amend the consumer protection clause, that according to the intent of the legislator Sec 617 ACCP must also be applied in shareholder disputes. In its concluding remarks the Supreme Court further held that its reasoning was also in line with a teleological interpretation of Sec 617 ACCP.
Following this conclusion, the Supreme Court had to investigate whether the two Claimants could rely on the consumer protection clause of the Austrian Arbitration Act. Hence, it had to decide, whether the consumer definition has to be taken from Austrian law, or the law at the place of origin of each party. Again relying on the intent of the legislator, the Supreme Court came to the conclusion that Austrian law must always be applied in determining whether a person is a consumer or an entrepreneur.
Hence, the last step in deciding whether the two arbitral awards had to be set aside was the determination if the two Claimants were consumers under Austrian law. After noting that according to Sec 1 Austrian Consumer Protection Act (“ACPA”) a person qualifies as a consumer, if a transaction does not pertain to the conduct of its business, the Supreme Court gave an overview of its past case law and scholarly opinion with respect to the qualification of shareholders as consumers or entrepreneurs. According to the Supreme Court’s case law, a shareholder is a consumer when he/she only makes a financial investment and has no real influence on the management of the company.
The Supreme Court, following its economic approach in determining the application of the consumer protection clause, came to the conclusion that the First Claimant dominated the operation of the relevant companies and was hence no consumer, as the conclusion of the joint venture agreement pertained to his business. In relation to Second Claimant, the Supreme Court held that the establishment incorporated in Liechtenstein cannot invoke consumer protection law, because (i) according to Austrian law such establishment always qualifies as entrepreneur and (ii) the conclusion of the joint venture agreement in any case formed part of its business. Thus, the Supreme Court dismissed Claimant’s plea to set aside the two arbitral awards.
The decision of the Supreme Court was only quite recently published. However, it has already caused uproar in the Austrian legal community over its presumed negative implications for arbitration proceedings over shareholder disputes in Austria. The two Austrian high-profile newspapers (ie Der Standard and Die Presse) – after consulting with arbitration specialists – already called for a legislative reform. Further, it is to be expected that in the upcoming months several scholarly opinions will critically analyse the Supreme Court decision.
Amongst other reasons, the Supreme Court’s interpretation of Sec 617 ACCP with reference to the legislative intent seems to be highly problematic, as a revision of the consumer protection clause with the 2013 reform was mainly omitted to ensure that the amendment would be passed in the shortest possible time and it was to be expected that an amendment of the consumer protection clause would protract the legislative process considerably.
Furthermore, the Supreme Court’s demand to apply Sec 617 ACCP in any arbitration proceeding seated in Austria – irrespective of the parties’ origin – seems to be excessive, as there is no valid reason to bring parties under the protective cover of the Austrian consumer law when, according to the law of their origin, they could validly conclude the arbitration agreement. Furthermore, the stance taken by the Supreme Court could lead to a situation where a party to an arbitration agreement could neither call upon the generally competent state court – as the court would have to dismiss the action due to the arbitration agreement –, nor upon the arbitral tribunal seated in Austria – as the arbitration agreement would be deemed ineffective due to the Austrian consumer protection clause. The respective respondent would basically have the power to invoke lack of jurisdiction in the first proceedings. How and whether such a conundrum can be solved, is depended on the involved jurisdictions, but would considerably protract legal proceedings.
Another, quite problematic situation arises in cases where the arbitration agreement empowers a third party to designate the seat of the arbitration, and such third party chooses a place in Austria as seat of the arbitration. Again, irrespective of the validity of the arbitration agreement at the place of the origin of the parties, the arbitration agreement would be ineffective under Austrian law in case one of the concerned parties is a consumer (according to Austrian law the seat has to be designated in the arbitration agreement). Hence the designating party can invalidate (whether intentionally or not) an otherwise valid arbitration agreement by merely choosing Austria as seat of the arbitration.
The Supreme Court has arguably created a situation – against the legislator’s intent –, in which parties will think twice about designating a place in Austria as the seat of their arbitration proceedings wherever their arbitration agreement is incorporated in articles of association. In the light of this decision, it seems to be unavoidable for the legislator to take action and to clarify once and for all that the protection of consumers – while laudable in the right context – has no place in multi-million-euro deals.